Leading investment house hits out at optimism for near term gains in global emerging markets equities

News - Savings

Written by Ray Clancy

Monday, 15 March 2010 09:07

There is currently not enough evidence to suggest that global emerging markets equities will outperform developed markets in the near term, according to research by a leading investment house.

Many commentators’ optimistic outlook for global emerging markets equities is overplayed and despite record inflows into the sector the near term returns will be no better than their developed economy counterparts, says Standard Life Investments.

Indeed, Standard Life Investments’ warns that there are a number of traps which investors can fall into when examining global emerging markets equities.

The first issue is that country analysis does matter and that individual countries within the GEM universe will have very different futures. Many investors assume that GEM equities always provide superior returns compared to developed equity markets, when in practice there has been considerable under-performance over certain time periods.

While some investors argue that GEM equity valuations are justified on the basis of faster growth in these economies research, for example by the London Business School, shows that in practice there has been little clear relationship between real growth in GDP per capita and stock market performance, either in GEM or developed economies, it claims.

‘It is certainly the case that there are important structural drivers such as an expanding middle class supporting consumer spending, and more market friendly economic and monetary policies, that will support GEM equity markets going forwards,’ said Andrew Milligan, Head of Global Strategy at Standard Life Investments.

‘However, our analysis shows that when current valuation signals were seen in the past then near term returns from GEM equities have been no better on balance than their developed economy counterparts. In certain circumstances, such as a double dip recession in the developed economies, their future returns could be rather worse,’ he explained.

‘Our preference for accessing these emerging market opportunities is via companies listed in the developed economic blocs, as they are better regulated, more liquid and are on valuation
discounts to their GEM peer group,’ Milligan added.

‘As an example, about one quarter of the profits of the UK’s FTSE350 index comes from emerging markets. We currently see many opportunities in a range of sectors, for the benefit of our clients,’ he concluded.